The influential UK Commercial Property Lending Market mid-year report by De Montfort University, published today, found that the value of outstanding, on-balance-sheet debt fell from £208.4bn to £201.3bn in the six months to June 2011, a reduction of 3.4%.
However, it also delivered a stark warning of the scale of the challenge facing property lenders, revealing that around a half of this debt, in a range of £85bn-£114bn, could not be refinanced on current market terms and that one quarter was secured on a loan-to-value ratio of more than 100%.
The study, the largest of its kind to look at UK commercial property debt, estimated total UK debt of between £280bn and £292bn at midyear 2011 (down from £288bn to £298bn at the end of 2010) including £46bn outstanding in the CMBS market and an estimated £19.9bn held by NAMA - Ireland's "bad bank".
This continued the measured reduction in debt seen during 2010 that has so far avoided a fire sale of property assets and a collapse in capital values. Report joint author Bill Maxted said the "process of deleveraging continued at a modest pace during the first half of 2011".
However, the report found that the uncertainty triggered by the deepening Eurozone crisis and the lack of growth in the UK economy had exacerbated the ongoing lack of liquidity and increasing costs of capital in the property lending market.
Investigating the loan-to-value ratios of lenders' loan books for the first time, the report found that 41% - 56%, or £84 to £114bn, of loans "may not be refinancable on lending terms available in the market at mid-year 2011".
Falling investment values meant that one quarter of this debt (24%) had a LTV ratio of above 100%, while just one fifth (21%) had an LTV ratio of less than 60%.
Lenders have been willing to extend maturing debt on non-market terms, with £48.4bn of these loan extensions recorded by the research since 2009. Consistent with that, a recent FSA survey found around 33% of commercial property loans, representing £66bn, to be in some form of forbearance.
The lending market also continued to contract. Two-thirds of lenders (66%) said commercial property was an asset class against which they were willing to lend, but the proportion intending to increase the size of their loan books fell from around half (46%) to one third (35%) at mid-year 2011.
Almost all of those willing to lend (64% of respondents) would do so against a prime office property, compared with just 29% for a loan secured by a secondary office.
And further regional disparities were also highlighted by respondents. London and the South East were seen as being in "recovery mode" while "recovery in the provincial markets could take six years or perhaps longer to achieve with much pain during this period" - a gap described as "enormous" and "unbelievable" by respondents.
Development finance remained challenging. Those willing to lend against a fully pre-let development fell from 52% to 31%, and those willing to lend against speculative development fell from 17% to 15%.
Bill Maxted said:
"Lending organisations commented that the existing liquidity crisis had been made more acute by the problems of European sovereign debt and the unknown extent of contagion between banks.
"Respondents have suggested that only an increase in confidence in the UK economy, demonstrated by a number of quarters of sustained growth in UK GDP, would signal a recovery in the commercial property market in the UK."
Liz Peace, chief executive of the British Property Federation, the leading body representing developers and investors, said:
"These figures underline how critically important it is for government to use all of the tools at its disposal to help tackle this overhanging property debt.
"This means encouraging new debt buyers in to the market - something that we think reform of the real estate investment trust regime to allow the creation of mortgage reits would help to achieve.
"It also means finding ways to encourage new investment and spur economic growth. One easy way would be to stop charging full business rates on empty commercial properties, something that is a considerable disincentive for landlords who wish to invest in premises for small and medium firms."
